By announcing it is only willing to purchase Spanish and Italian government bonds if these governments apply for funding from the EFSF bailout fund, the ECB is now exerting pressure on these countries to sign full bailout agreements. Officially,Mario Dragih’s position on how the ECB engages with governments (as explained at his June press conference) is
I do not view it as the ECB’s task to push governments into doing something. It is really their own decision as to whether they want to access the EFSF or not.
In reality, the record of the ECB’s role in Ireland’s bailout application (admittedly at the time under the leadership of Draghi’s predecessor) suggests it is an organization that is not at all averse to pushing governments into bailout funds. As the facts below illustrate, this record also doesn’t provide encouragement that the ECB will act in an open and transparent manner when doing so.
In the months leading up to Ireland’s bailout agreement, the ECB had become increasingly concerned about the amount of money it was loaning to Irish banks. In early November, it appears the ECB decided it needed to intervene.
On Friday November 12, 2010, Reuters reported that Ireland was in talks with the EU to receive emergency funding. The Irish government denied that any official talks were taking place. However, Brian Lenihan, Ireland’s Minister for Finance at the time, subsequently told a BBC documentary that, on this same day he received a letter from Jean-Claude Trichet advising him that Ireland should enter an EU-IMF program. Lenihan was adamant that “the major force of pressure for a bailout came from the ECB”.
The Irish Times has reported that
Dublin officials believed the letter to be forthright, with an implicit threat that support for Ireland’s banks was at risk.
Alan Ahearne, Lenihan’s economic adviser at the time, confirmed these reports to the Irish Independent:
“Yeah, the letter came in on the Friday from Trichet. The ECB were getting very hostile about the amount of money that it was having to lend to Ireland’s banks. The ECB demanded something be done about it and it mentioned Ireland going into the bailout. They were keen to get Ireland into the programme.”
He added: “Lenihan rang Trichet that day, and they agreed officials would meet the following day in Brussels. When they met, the ECB put huge pressure on Ireland to go into the programme.”
Ahearne said Lenihan was now at the centre of international chaos and Ireland’s future hung in the balance.
“The following Tuesday, Lenihan went to the eurozone meeting …”
The Independent story does not state the date of arrival of Trichet’s letter but the reference to a Eurozone meeting on the following Tuesday confirms November 12 as the date.
Within weeks of the receipt of this letter, Ireland had entered an EU-IMF financial assistance programme. Given the key role the ECB letter of November 12 appears to have played in such an important event in Europe’s economic history, one might hope that this letter would now be in the public domain. However, the letter has not been released.
Last December, an Irish journalist, Gavin Sheridan requested that the ECB provide him with “any and all communications from the ECB addressed to the Irish finance minister (or his direct office) in the month of November 2010”.
The ECB responded by supplying one letter dated November 18 (a technical communication relating to payments systems) but refused to supply another letter that dated November 19 (one week after the Reuters story and one day after Central Bank of Ireland Governor Patrick Honohan conceded that a bailout deal was likely).
The ECB’s justifications for not releasing the letter included the following paragraph:
The second letter, dated 19 November 2010, is a strictly confidential communication between the ECB President and the Irish Minister of Finance and concerns measures addressing the extraordinarily severe and difficult situation of the Irish financial sector and their repercussions on the integrity of the euro area monetary policy and the stability of the Irish financial sector.
The content of the letter was alluded to as follows:
The ECB must be in a position to convey pertinent and candid messages to European and national authorities in the manner judged to be the most effective to serve the public interest as regards the fulfilment of its mandate. If required and in the best interest of the public also effective informal and confidential communication must be possible and should not be undermined by the prospect of publicity. In this case, the confidential communication was aimed at discussing measures conducive to protecting the effectiveness and integrity of the ECB’s monetary policy and fostering an environment that ultimately contribute to restoring confidence among investors in the overall solvency and sustainability of the Irish financial sector and markets, which, in turn, is of overriding importance for the smooth conduct of monetary policy.
These communications raise a number of questions:
- Did the ECB communicate with Brian Lenihan on November 12, 2010? If so, why was this letter not referred to in response to Mr. Sheridan’s request?
- Did the ECB threaten to withdraw funding from Irish banks unless Ireland entered an EU-IMF program, either in a letter dated November 12 or in meetings the following weekend?
- What are the contents of the November 19 letter and why is this letter considered so sensitive given that it was clear to all after Governor Honohan’s remarks on November 18 that a bailout deal was being concluded?
I believe the Irish and wider European public deserve a better explanation of the events of November 2010 from the ECB. The public release of all communications from Mr. Trichet to Minister Lenihan should be part of this explanation.